It is being dubbed the next "mega-trend" for the stockmarket. Companies that focus on alternative energy and combating climate change will offer outstanding growth for investors, while the environmental laggards will face increasing pollution taxes and penalties. Surely this is a one-way bet for investors with both profits and principles in mind?

Already British investors, even those with as little as £50 a month to invest, can choose from a number of funds promising to direct your cash into the environmental industries of the future. Schroders and HSBC were among the first to launch climate change funds in 2007, followed soon after by Virgin Money. Other big-name providers include F&C and BlackRock (formerly Merrill Lynch).

This summer Clare Brook, the doyenne of the green sector, launched the Sustainability fund backed by WHEB Ventures, a leading cleantech venture capital house. Next month sees Tiburon Green, the first fund focusing on efforts to tackle climate change in Asia.

Does this sound like a bandwagon? Yes, say critics, who warn that the climate change "story" is already in the price of the shares, so investors coming in today will be burned. For example, at the end of 2007, shares in Q Cells, the cutting-edge German maker of solar power panels, were trading at nearly €100 (£87). Today they are bumping along at €10. Meanwhile wind turbine maker Vestas, which closed its Isle of Wight plant, is trading at half its mid-2008 high. And does anyone remember Ballard, the Canadian zero-emission fuel cell maker, a one-time darling of the green energy sector? It traded at C$120 (£66) in February 2000, but if you invested then you'd have lost a fortune: it now trades at just C$1.70.

There's a perception problem with environmental investing. Either (a) the technology fails and the shares become worthless; or (b) the technology works (like Q Cells) but the Chinese come in, massively over-produce, push down prices and wipe out profits.

But the fact that hard-nosed fund managers at Britain's top investment houses are piling in suggests this is not just a product for bleeding-heart liberals. Simon Webber co-manages Schroder's Global Climate Change fund, one of the first to launch back in 2007. He says: "Climate change is not going to go away. It will require us to move to a low-carbon economy, and will affect sectors such as transport, agriculture, retailing and infrastructure. It touches almost everything in our lives."

He acknowledges the problems with solar. "Last year we had no solar in the fund – we could see stocks were overpriced and the over-capacity coming along. That said, we will be changing our energy systems towards nuclear, wind and solar. It's hard to dispute."

There are now at least 700 investable companies directly involved in climate change, says Schroders. HSBC has set up a FTSE 100-style index made up of companies involved in tackling climate change. Called the HSBC Climate Change Benchmark Index, it shows that, on average, since 2004, companies in the index have given investors a 48% gain (in dollar terms). But that conceals a rollercoaster ride. The index started at 100 in January 2004, soared to 235 in July 2007, then marched back down to 100.69 in March this year. Since then, it has leapt ahead again, and this week stood at 148.23.

If that makes you fearful that you could be buying into a "sucker's rally", then don't despair, says Brook. She has run Jupiter's Ecology fund, set up NPI's Global Care funds, and managed Aviva's SRI funds. She took each one from virtually nothing to nearly £1bn in size.

Sustainability is Brook's own fund and she says there's still a world of opportunity in environmental investing.

She splits her fund between three "mega-themes" of climate change, water and demographics. What excites her most are the stocks that will benefit from the stimulus packages announced by governments to revive economies – many of which have distinct environmental promises. "The beneficiaries of stimulus spending will be infrastructure such as rail, water piping, smart metering, energy efficiency and insulation," she says.

Water is a huge climate change issue which will force massive spending to manage dwindling supplies. Brook likes companies such as Itron, a supplier of automatic meter-reading technology, and Epure, a Singapore-based company working on improving China's drinking water quality.

Even the Mayfair hedge funds are getting involved. Tiburon Partners specialises in "absolute returns" from Asian stocks, but is now launching a hedge fund focusing on renewable energy – making money from stocks that will rise and also from ones they think will fall. Managing partner Mark Martyrossian believes "there may be a good argument for going short German solar and long Chinese solar ... we're not saying smokestack China is going to disappear overnight, but the Chinese are introducing some great initiatives and it's happening at the local as well as national level." Tiburon is also launching a long-only version of the fund for more cautious investors.

Playing your part

Guardian

Fund managers Clare Brook and Nicola Donnelly (left) of WHEB Sustainability have signed up to 10:10 campaign, supported by the Guardian, in which individuals pledge to cut 10% from their emissions by 2010. "We both cycle already and try to fly as little as possible, but we're going to try taking showers instead of baths and also will try turning the heating down," says Brook. "I'll be taking a leaf out of my grandparents' book, who kept an incredibly cold house and used to sit at the dining table wearing several huskies each!"

You can commit individually to cutting your emissions at www.1010uk.org. Share your experience of trying to live a lower-carbon life and get advice from our experts at guardian.co.uk/10-10